AFLAC: Quack, Quack

09/05/2014 8:00 am EST


Timothy Lutts

Publisher, Cabot Heritage Corporation

Our latest recommendation is a name known to virtually all Americans, thanks to television. But a major fact about the company will likely surprise you, asserts Timothy Lutts, editor of Cabot Stock of the Month.

Everyone knows AFLAC (AFL) these days, not least because of the duck, which has been featured in the company’s TV commercials since December 1999.

The surprising thing about AFLAC is that three-fourths of revenue comes from Japan, where the company is the largest issuer of life insurance policies, while only one-fourth comes from the US.

In the US, the company is the leading provider of voluntary insurance in the workplace, typically paid for through payroll deductions. In Japan, in addition to life insurance, the company sells medical and cancer insurance.

AFLAC has been recognized by Ethisphere magazine as one of the World’s Most Ethical Companies for eight consecutive years. In 2014, Fortune magazine recognized AFLAC as one of the 100 Best Companies to Work For in America for the 16th consecutive year.

In sum, it’s a well-respected company, and that’s because it’s well run. AFLAC has grown revenues over each year of the past decade—generally between 5% and 15% per year—and grown earnings over each year save one, 2013.

The one big reason that earnings fell in 2013 was that the dollar was strong versus the yen; that hurt when converting to dollars for financial statements. But the company doesn’t actually convert yen to dollars for its operations, so operating earnings were actually up. And the same is true this year as well!

The company has a 30-year history of increasing dividends. Over the past five years, the company has increased dividends at a compound annual growth rate of 6.5% per year. The current dividend yields 2.4% per year, for a payout ratio of a comfortable 22%.

So, we’ve got a well-run company in a temporary slump thanks mainly to the strong value of the US dollar relative to the yen. AFL peaked at $67 late last year. It fell below $59 at the end of July, as the “bad news” about yen conversion in the second quarter sparked a flurry of high-volume selling.

Now, I see the rebound since (also on big volume), which implies that smarter investors interpreted that panic selling as an opportunity to step up and get a good stock at a bargain price.

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